A Closer Look At Two Contrarian Leisure Opportunities

27th May '20 by Jack Brumby

8 comments 3214 reads

So much depends on your investment horizon.

Markets could well get worse before they get better - it’s not hard to envision negative scenarios that aren’t really priced into the market. On a 12-24 month view, there is great uncertainty. But if you are thinking in terms of five years or more, this could actually be a good time to get into UK equities in terms of valuation.

UK Leisure has been hammered, and understandably. There are signs of lockdown being eased but this could all be reversed at the drop of a hat. If you look further out it gets easier to see a path back to previous levels of trading, but many companies in affected areas will go out of business between now and then.

I worry that most of the businesses to suffer will be smaller single and multi-site operators. Larger companies tend to have better access to more financing options and more favourable rates. As such they are better placed to navigate these conditions.

We’ve seen a raft of fundraisings from larger, public companies over the past week. These placings aren’t a silver bullet, but each one marks a de-risking to one degree or another in the respective company:

22 May - On The Beach placing, gross proceeds of £67.3m
21 May - Dart Group placing, gross proceeds of £172m
21 May - Whitbread underwritten rights issue, gross proceeds of £1bn
19 May - Compass Group placing, gross proceeds of £2bn

For many it is still too early to invest, with too many important unknowns. Key issues include:

When sites open. Social distancing is here for a while. At least until Christmas and possibly longer. This probably means operators with larger sites stand more chance.
Their level of trade. How will customers behave once they are allowed to go out?
The cost of reopening (stocking, cleaning, re-staffing).
Wider economic impacts of the lockdown. Everything else could just be rearranging deckchairs on the Titanic if the global economy tanks.
Potential for a second spike and timing of a vaccine.
Company-specific working capital requirements.

Restaurants: the canary in the coal mine

Even if you have no intention of going anywhere near this part of the market, it employs nearly two million people in the UK (or at least it did) and so it provides useful readacross.

Looking to countries further along the curve helps. This article…

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FREng

27th May '20

Thanks, Jack, for a very thought-provoking article. Companies like VISA and OpenTable have a really useful real-time picture of what is happening in individual countries as the restrictions get lifted, reimposed and lifted again. Do you know a website that offers PIs access to data like that?

Chriselli63

do you think they will pick up some small pub chains who are not liquid(excuse the pun) with the money they have?

ben316

Interesting article, thanks Jack!

Jack Brumby

Hey FREng,

I haven't found one standout site for that type of data - I've typically been coming across it as various trackers etc. issue press releases. You've mentioned OpenTable which comes up with good data here for the US, UK, parts of Europe, and Australia.

CGA's monitors are good but focused on the UK.

If anybody has any other good sources for this type of thing then it would be great to hear them.

AJ0nes

Hi Jack,

Thanks for the write up . You mentioned wanting to see some more info on the £34m deferred payment for Marston's. The document here https://www.marstons.co.uk/docs/jv/2020/Marstons_PLC_forms_JV_Partnership_with_Carlsberg_UK_220520.pdf states that it "will be calculated on a linear basis based on the extent to which the 3-month VWAP (volume-weighted average price) of a pre-agreed basket of companies recovers (or not) between the date of Completion and the date that is 12-months after Completion. The recovery of the pre-agreed basket of companies will be benchmarked against the share price performance of those companies between (2nd March 2020 and 15th May 2020). If the recovery of the pre-agreed basket of companies is equal to or exceeds the benchmark reduction, then the full amount of the deferred contingent payment will be payable." Hopefully that's helpful!

I think Marston's (LON:MARS) is an interesting one with just the brewing division alone being valued at £580m and the current market cap being lower than this, essentially valuing the whole pub portfolio at less than zero?!. Obviously the big factor is what sort of eventual recovery there will be to the pub business and whether the large debt will continue to be manageable. I think the latest debt negotiations certainly help to reduce risk.

A simple look at the last annual report shows property valued at c.£2.35b with net assets being £811m which suggests the company is potentially significantly undervalued on an asset basis but the question is whether the property is actually worth that much. Note 12 says the properties were revalued at 28 Jan 2018 on an open market value basis but looking further down under "Fair Value of Land and Buildings" the vast majority of the property is noted under Level 2 with the values "obtained using a market approach, primarily using earnings multiples derived from prices in observed transactions involving comparable businesses...there are two inputs to the fair value measurement of the public house assets, being the fair maintainable trade and the multiplier applied".

I'm no expert when it comes to valuing commercial properties or pubs in particular but if they're valued based on a multiple of a "Fair maintainable trade" then surely any large and/or prolonged impact to trade would have a significant impact on the value of the property? If anyone knows more about this and has more insight into the valuation process then I'd be happy to be educated on the matter.

LimaWhiskey

28th May '20

Held Restaurant for a while, selling about a fortnight ago for a decent % gain. Personally I started to get twitchy about their lack of capital and got unsure about the uptake we'll see post lockdown. Their delivery business for Wagamama relies on expensive city-center type sites rather than your corner takeaway reducing the profits per delivery and isn't going to be easy to remain both profitable and socially distanced enough to encourage the footfall they need.

one_eyed_jack

29th May '20

There is a good take on the restaurant sector in the FT today by Tim Hayward - What is the future of restaurants? His view is that the fast food sector will bounce back fine if they can find the staff at minimum wage, the lower margin independents, who do it for the love of food, will recover/start again, but it going to be hard. The investment grade chains he is less positive about. He considers the margins already being tight pre-lockdown and they may have been a bubble which was going to burst anyway. There are some good comments worth reading as well.

Simon Rowan

1st Jun '20

You could argue that the Sp of rtn doubled in a day on the announcement of their placing, something that has never happened before as far as I am aware. Cant understand how they pulled that off. Huge sums of money continue to be raised in this way which in itself is astonishing.

I traded RTN quite a bit last year, after the rights issue to buy Wagamama. It was the limited success and contraction of expansion plans of its new acquisition that made me aware that the timing of this was unfortunate. In a sense they couldn't afford not to buy it in a attempt for survival. No way was a non expanding over priced Wagamama ever going to offset their dire leisure arm. Unlike many in their sector the writing was on the wall long before the virus. I did ok out of RTN last year, possibly with a large slice of luck and a certain amount of twitchiness. I'm not about to give it back! of the 2, I prefer the free holds and Carlsberg deal of Mars. Might have a go at that on any further weakness. Thanks for the very useful article.

A closer look at two contrarian Leisure opportunities

Restaurants: the canary in the coal mine

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Jack Brumby

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